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Finance Minister Nirmala Sitharaman) said that countries would have to “prepare to engage” with stablecoins.

What are Stable Coins?

Stablecoins are a form of cryptocurrency that attempt to maintain stable prices as they are pegged to an underlying asset, such as a basket of currencies or precious metals.

Importance of Stable Coins

• This makes them suitable for everyday transactions and contracts, unlike volatile cryptocurrencies.

• They provide a stable unit of account and store of value in decentralized platforms.
• Cross-border payments using stablecoins are faster and cheaper than traditional systems like SWIFT.

• Useful for remittances, especially in regions with limited access to banking.

Stablecoins vs. Cryptocurrency

• Value Stability: Stablecoins aim to keep their price constant whereas Cryptocurrencies like Bitcoin fluctuate in price due to market forces.

• Risk: Stablecoins carry less price risk, Cryptos are riskier due to price swings but offer higher potential returns.

• Functionality: Stablecoins are mainly used for everyday transactions, and as a trading pair. Cryptocurrencies are used for investment, mining rewards etc.

• Backing: Stable coins are backed by assets like gold, RBI reserves etc. but Crypto’s are not backed by anything. 

Benefits of Stable Coins

• Minimizes volatility compared to regular cryptocurrencies like Bitcoin or Ethereum.

• Enables instant global payments.

• Acts as a stable unit of account in decentralized platforms.

• Ideal for merchants or users who want stability without relying on banks.

• In countries with unstable currencies, stablecoins offer a asset-pegged alternative.

Why Stablecoins not suitable for India?

Indian Payment Systems Are Already World-Class

• Unified Payments Interface (UPI) handles around 50% of global digital payment volume, letting millions send money instantly for nearly zero cost.  
• RTGS (Real Time Gross Settlement) and NEFT (National Electronic Funds Transfer) move large sums quickly, and Aadhaar simplifies ID checks.
• The Digital Rupee, a blockchain-based currency from RBI, offers stablecoin-like tech with government backing. Stablecoins add no value addition.

 Remittance Savings Are Overhyped

• While stablecoins could cut remittance fees, India’s formal channels are already efficient.
• Banks and services like Western Union integrate with UPI, keeping costs low. 
• The Digital Rupee could further streamline cross-border payments without private stablecoins’ risks.

 DeFi Is Niche and Risky

• Stablecoins in DeFi rely on private reserves or algorithms, which can fail. For example, TerraUSD crashed by 60% in 2022. 
• India’s regulated banking system, with strong capital and credit quality, offers safer lending and borrowing.

 U.S. Model Doesn’t Apply

• The U.S. GENIUS Act requires stablecoins to hold safe assets, but risks remain without a central bank safety net.
• Indian economy, built on tight rules and stability, can’t afford to mimic a country with a history of exporting financial crises.

Way Forward

• Strengthen UPI and Digital Rupee: Upgrade UPI for cost effective global remittances and expand the Digital Rupee for blockchain-based payments with RBI’s trust. 

• Regulate Strictly or Ban: If stablecoins are allowed, make companies hold 100%-rupee reserves under RBI’s watch, or ban dollar-backed stablecoins to protect the rupee. 

• Focus on Safe Blockchain Tech: Use blockchain for deposit tokens (digital bank deposits) for business payments, which follow strict rules unlike stablecoins. 

• Shape Global Rules: Work with the G20 to set stablecoin standards that suit India’s needs, avoiding risks to emerging economies.

 Source: The Hindu and IASGYAN